CONSOL reports Q1 2015 earnings; coal spinoffs still in the works

Coal and natural gas producer CONSOL Energy (NYSE: CNX) on April 28 reported net income of $79 million for the first quarter, compared to net income of $116 million from the year-earlier quarter, which included a loss from discontinued operations of $6 million.

CONSOL’s Coal Division produced 8.3 million tons in the 2015 first quarter. In the Virginia Operations, CONSOL’s premier Buchanan Mine, again, repeated another stellar cost performance. Total costs at Buchanan Mine, which produces metallurgical coal out of the Pocahontas seam, were $42.31 per ton sold in the just-ended quarter, or a reduction of $24.10 per ton from the year-earlier quarter.

CONSOL said its thermal coal marketing strategy continues to see success by contracting additional volumes and building a portfolio that targets power plants expected to not only survive, but to also potentially increase their consumption of coal despite a tightening regulatory environment.

“The playbook of yesterday’s coal marketing era of bigger is better, does not necessarily equate to success today, and CONSOL has embraced this changing dynamic by concentrating our footprint and strategically partnering with the power plants that will be around for many years to come,” commented Nicholas J. DeIuliis, CONSOL president and CEO. “Despite the prominence of shale gas growth and increasing gas demand over the years, coal’s market share may be declining, but it’s not going away. That said, the industry has clearly changed, and it has changed permanently. CONSOL will continue to benefit by strategically partnering with the must-run power plants that will survive and run even harder as they make up capacity that is scheduled to come offline.”

CONSOL remains on-track to execute the previously announced transactions for a thermal coal master limited partnership (MLP) and MetCo initial public offering (IPO). The company recently filed a registration statement on Form S-1 with the Securities and Exchange Commission for the thermal coal MLP, which will be known as CNX Coal Resources LP (CNXC), and CONSOL continues to expect a mid-year 2015 IPO. The company continues to expect the MetCo IPO, which includes metallurgical coal operations, to occur around early fourth quarter 2015.

During the first quarter, CONSOL’s Coal Division produced 8.3 million tons, which was in-line with previous quarter’s guidance of 8.0 million-8.5 million tons. Total coal division unit costs were improved $1.80 per ton in the first quarter 2015, compared to the same quarter 2014.

  • The Bailey Mine in southwest Pennsylvania produced 2.9 million tons in the first quarter, compared to 3.1 million tons produced in the year-earlier quarter.
  • The Enlow Fork Mine produced 2.6 million tons in the first quarter, compared to 3.1 million tons produced in the year-earlier quarter.
  • The Harvey Mine produced 1.0 million tons in the first quarter, compared to 0.2 million tons produced in the year-earlier quarter.

All three of these longwall-equipped mines works the Pittsburgh seam and feed raw coal into the Bailey prep plant. Challenging geological conditions, lower recovery rates, and lower tonnage at the Enlow Fork and Harvey mines contributed to higher costs in the quarter for the Pennsylvania Operations of $42.73 per ton, when compared to $40.29 per ton in the year-earlier quarter. CONSOL expects second quarter 2015 total unit costs to be modestly higher due to continuing geological challenges, as well as scheduled longwall moves, which result in lower forecasted tons. However, CONSOL expects the geological conditions to improve in the second half of the year as the company mines through these areas and moves into longwall panels with less challenges, which should result in costs improving.

The Buchanan Mine continued to operate on a reduced schedule of two shifts per day and produced 1.2 million tons during the first quarter, compared to 1.1 million tons produced in the year-earlier quarter. The reduced schedule allowed the Virginia Operations to optimize its cost structure, which is reflected in much lower all-in unit costs during the first quarter 2015 of $42.31 per ton, compared to $66.41 per ton in the year-earlier quarter. Better utilization from previously completed efficiency projects, which reduce travel time to the face of the longwall, are continuing to help improve unit costs. Buchanan is able to quickly ramp up to the full production capacity rate of 5.2 million tons per year when market conditions warrant. CONSOL expects Virginia Operations total unit costs to increase to the low $50 per ton range due to lower forecasted quarterly tons for the remainder of the year, compared to the first quarter, and the company planning to bring back a development section to the mine late in the second quarter, or early third quarter.

The Miller Creek complex in southern West Virginia produced 0.6 million tons for the first quarter, which is in-line when compared to the year-earlier quarter.

Coal Marketing Update

Pennsylvania Operations

CONSOL’s Pennsylvania Operations had a strong first quarter for production, shipments, and tons sold. While demand and pricing in spot markets remain challenged, CONSOL’s low cost operations allow the company to not only participate in these short-term markets at positive margins, but to also expand its customer base. Internationally, new customers continue to test CONSOL coal, and domestically, the company is steadily building a portfolio with targeted power plants that CONSOL expects, will not only endure in future energy markets, but also have the potential to increase their consumption of coal.

During the quarter, CONSOL sold 6.5 million tons of coal to 39 different end users. CONSOL’s customers continue to demonstrate a steady demand for coal through term contracts that vary in length. During the quarter, CONSOL contracted for 1.9 million additional tons for 2015, bringing the total firm and priced contracted position to 22.6 million tons, or 88% of estimated sales volumes based on the midpoint of guidance. For 2016, CONSOL contracted for 1.1 million additional tons, bringing the total firm and priced contracted position to 12.9 million tons, or 50% (and sold position to 14.4 million tons, or 56%) of expected sales volumes based on the midpoint of guidance. For 2017 and 2018 combined, CONSOL’s committed position is averaged at approximately 40% of expected sales volumes.

Virginia Operations

The Buchanan Mine continues to demonstrate industry leading cost performance that allows the operations to maintain positive margins in today’s metallurgical coal markets and expand its portfolio of customers. This positions the mine to be the best suited domestic met coal production facility to take advantage of markets when they rebound.

In the first quarter, CONSOL sold 1.2 million tons of its Buchanan low-vol coal, which included a new sales opportunity to a significant met coal end user in China. The new opportunity in China, combined with existing business from traditional customers, has enabled CONSOL to exceed its production forecast at Buchanan in the first quarter. During the quarter, CONSOL contracted for 0.7 million additional tons for 2015 and expects continued demand for Buchanan coal throughout the year. CONSOL expects to ship about 75% of Buchanan’s production to customers in the U.S. and Atlantic Basin in 2015.

Other

In the first quarter, CONSOL sold 0.5 million tons of Miller Creek coal, which is flat compared to the year-earlier quarter. CONSOL’s total firm and priced contracted position for 2015 and for 2016 remains the same at 1.9 million tons for 2015, or 93% of estimated sales volumes based on the midpoint of guidance, and 0.9 million tons for 2016, or 41% (and sold position to 1.9 million tons, or 90%) of estimated sales volumes based on the midpoint of guidance.

CONSOL also continues to benefit from its Western Allegheny Energy joint venture in Pennsylvania, as well as working closely with its marketing partner to explore global opportunities for new coal customers.

Additionally, CONSOL’s wholly-owned Baltimore Terminal had a strong quarter by shipping 3.5 million net tons, which also included third-party tons.

CONSOL offers coal guidance

In the second quarter of 2015, Pennsylvania Operations sales guidance is lower due to a number of planned non-productive days resulting from longwall moves and miner vacation days. Also, Virginia Operations sales guidance is slightly lower due to scheduled shaft repair work.
















       
     

COAL DIVISION GUIDANCE

       
         

Q2 2015

 

   2015

 

    2016

     

Est. Total Coal Sales

 

7.1 – 7.7

 

   30.5 – 33.0

 

    30.5 – 33.0

     

  Tonnage: Firm

 

6.7

 

   26.8

 

    14.5

     

  Price: Sold (firm)

 

 

$59.86

  

 

   $61.07

  

 

    $61.22

     

Est. PA Operations Sales

 

5.8 – 6.1

 

   24.9 – 26.6

 

    24.9 – 26.6

     

  Tonnage: Firm

 

5.6

 

   22.6

 

    12.9

     

Est. VA Operations Sales

 

0.9 – 1.1

 

   3.7 – 4.2

 

    3.7 – 4.2

     

  Tonnage: Firm

 

0.6

 

   2.3

 

    0.8

     

Est. Other Sales

 

0.4 – 0.5

 

   1.9 – 2.2

 

    1.9 – 2.2

     

  Tonnage: Firm

 

0.5

 

   1.9

 

    0.8

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.